The assumption in the economic order quantity model is that the order cost remain constant with the size of the order.
The ideal order quantity for a company to purchase in order to minimize inventory costs such as holding costs, shortage costs, and order costs is known as the economic order quantity (EOQ). The EOQ formula's goal is to determine the optimal number of product units to order. If this goal is met, a company's costs for purchasing, delivering, and storing units will be reduced.
The EOQ is a valuable cash flow tool. The formula can assist a business in controlling the amount of cash locked up in its inventory balance. Other than human resources, inventory is often the most valuable asset for many businesses, and these businesses must carry enough inventory to meet the needs of their customers. If EOQ can assist in reducing inventory levels, the cash savings can be used for another business purpose or investment.
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